Posted by: Josh Lehner | February 22, 2017

Oregon Economic and Revenue Forecast, March 2017

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

As the U.S. economic expansion approaches its eighth year, it appears to be on solid and stable footing. Thankfully, expansions do not die of old age and the current one appears to be free of imbalances so far. Most encouragingly, it seems that the manufacturing sector is pulling through its malaise of recent years. Combined with better-than-expected data in recent months and expectations that federal policy is likely to at least be somewhat expansionary, the U.S. macroeconomic outlook is modestly brighter today than three months ago. The expansion still has legs and room to run. What can drive recessions, however, are policy mistakes and/or an event that coordinates growing pessimism in the economy. Given the large uncertainty regarding specific federal policies, all eyes are on Washington D.C. at least until better clarity is given.

Oregon’s labor market continues to outperform the typical state, even as growth rates have slowed since last summer. Regional job gains continue to be more than enough to keep pace with a growing population, and all parts of the state are seeing growth. In fact, rural Oregon is adding jobs at a stronger pace than the nation overall. While federal policy uncertainty is not weighing on the outlook today, the range of possible outcomes is large. The most-discussed options generally fall into two camps when estimating their impact on Oregon. Some, like tax cuts, deregulation and infrastructure spending are likely to impact Oregon to the same degree as most states. However, others possible policies like rolling back the Medicaid expansion, worsening trade relations and federal land policy changes are likely to have an outsized impact in Oregon relative to the typical state.


Heading into the income tax filing season, Oregon’s General Fund revenue outlook remains on track. Expectations are virtually the same as they were when the 2015-17 biennial budget was crafted two years ago. Personal income tax collections are currently expected to land within $4 million of the Close of Session estimate, with overall General Fund revenues expected to land within $113 million (0.6%) of the Close of Session estimate.

Early in 2017, growth in personal income tax collections began to pick up. Little growth was seen during 2016 due to the impact of kicker payments for the 2013-15 biennium. With the vast majority of kicker payments now out of the door, growth rates are returning to normal.

As always, the verdict will remain out on personal income tax collections until after the April filing season is tallied.  This year, there is even more uncertainty in the tax season outlook than usual. This year, both federal and state refund payments were delayed until mid-February, and are just now beginning to ramp up.  A new tax processing system is adding to the uncertainty.  The nature and availability of data on tax payments has changed, and as a result, year-over-year comparisons are often misleading.

Corporate tax collections have posted healthy gains in recent months after falling sharply during most of 2016. Given the expectation that collections would return to historical norms, revenue declines were built into the forecast. Nationwide, corporate profits have taken a step back, largely due to rapid appreciation of the U.S. dollar and struggles among energy firms and other commodity producers.  With these downward pressures on profits having now eased, corporate profits and related tax collections are expected to stabilize going forward.

In keeping with a modestly stronger economic outlook, state revenues are revised upward over the 10-year forecast horizon. The majority of the increases come from personal, corporate, estate and liquor revenues. The lottery sales outlook has also been raised due to a somewhat more robust outlook for personal income and consumer spending.


See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 16, 2017

Foreign-Born Oregon Residents

On the heels of the recent post on diversity and Middle Eastern ancestry, our office wanted to get a better understanding of the foreign-born population here in Oregon. So we asked Kanhaiya in our office, and Charles Rynerson, demographer at Portland State’s Population Research Center, to help us with some data and information. What follows is a look at the historical trends here in Oregon, which countries our foreign-born residents came from and the like. Thanks Kanhaiya and Charles!

UPDATE: One reason this is important has to do with demography. Many foreign-born or minority households do have higher birth rates. Many of rural Oregon’s counties with a higher foreign-born or minority population share have better population outlooks as the natural increase (births minus deaths) remains positive. The natural increase has slowed considerably across the nation as the Baby Boomers age, and has turned negative in many parts of the country and in some areas here in Oregon.

The first chart shows the foreign-born population here in Oregon going back more than 150 years. The distinct growth and outright decline periods are interesting to note over this time. Clearly a lot of history embedded in this chart. For more seen PSU’s website Road to 4 Million.


Of the current foreign-born population, 40% were born in Mexico. This is by far the largest country of current foreign-born residents in Oregon and significantly larger than other regions of the world for that matter.


Now, what is interesting is that the vast majority of the Mexican-born Oregon residents came to the U.S. a decade or two ago. There has been very little international migration in recent years. There are two reasons for this. One has to do with Mexican demographics and the falling birth rate a generation or so ago, resulting in fewer potential immigrants today. The second has to do with the economy. The Mexican economy has actually performed pretty well in the last decade, while the U.S. has not. The economic incentives switched as the Great Recession wreaked havoc on the U.S. economy. Some national estimates, particularly of illegal residents, show population losses to Mexico in the years since the Great Recession and housing bust. That said, with the strong U.S. dollar and weak Mexican peso, some of these economic incentives are switching back. It will be interesting to see how this impacts international migration.


The county map below shows where within Oregon has the highest and lowest shares of foreign-born residents. The darkest blue counties are significantly above the state average and above the U.S. average as well. They account for about 40% of the Oregon population overall but 65% of the foreign-born population. The second darkest blue counties have a foreign-born share that is roughly equal to the statewide average. All other counties have significantly lower shares.


Lastly, via the U.S. State Department (HT Charles) one can track the number of refugees coming to Oregon. Over the past 15 years, Oregon has seen an average of about 1,000 refugees per year. In recent years about half of these refugees came from the seven countries that are explicitly listed in the executive order. Keep in mind that refugees have a specific definition — those who have been forced to leave their country due to violence or persecution — and the overall international migration flows tend to be larger.


Within Oregon, 84% of these refugees in the past 15 years arrived in the City of Portland. 97% within the Portland MSA overall. As such, obviously very few throughout the rest of the state. For example, I was recently down in Eugene for a presentation and in looking at the data, Eugene and Springfield saw 13 refugees in the past 15 years. For more on the patterns within the Portland MSA I would direct you to contact Charles who has some cool maps looking at neighborhoods, where languages other than English are spoken in the home and the like.

Posted by: Josh Lehner | February 9, 2017

Rural Housing Affordability

As a general rule of thumb rural areas have roughly 20% better housing affordability than urban areas across the U.S. Yes, incomes tend to be lower, however housing costs even more so. That said, a portion of rural communities face significant affordability challenges that are every bit as severe as some of the popular metropolitan areas. This is true here in Oregon, and the broader Mountain West as well.

In presentations our office regularly uses the map below to discuss how affordability really is a statewide challenge. It uses the price to income ratio, or actually the median home value to median household income ratio, for all rural counties in the nation. The color groups are tiered by quintiles, or deciles.

The darkest red counties represent the 10% least affordable rural counties in the country. These areas face affordability challenges on par with the 20% least affordable urban counties in the country. The patterns you see here include many resort towns and vacation destinations. This includes places like the coastal Northwest, the Boundary Waters, the Smoky Mountains, ski towns in Colorado and New England, and the like. One reason for the lack of affordability is the external demand, or the demand for second homes. Housing prices are not entirely representative of local incomes, but rather those able to afford vacation homes in some of the country’s most scenic areas.


However what also stands out is the broader Mountain West which is almost entirely orange or red. And while it can be a bit hard to tell what exactly is going on, we do know that not every one of these counties is a resort destination. In analyzing the data it’s not that incomes are particularly low — roughly inline with rural incomes across the country — rather it’s that housing costs are high. This is certainly true here in Oregon, as seen in the graph below. Furthermore, these affordability challenges stretch across the entire region and across a group of states with considerably different land use laws among other things.
My take is at least some of the regional affordability issues depend upon when development occurred over time and then demographic and population changes in recent decades. It’s no question that most rural communities face demographic challenges, however some more than others. Many of the rural counties that have seen population growth, or at least not large declines, are here in the Timber Belt and the West more generally. As such, demand remains relatively strong.

This is unlike the Plains, which is where I’m from. Many of those communities have housing stocks that were built for a larger population in decades past. For example the southeastern Kansas county where my Grandma spent much of her adult life (She’s still alive! Love you Grandma!) peaked in the 1920s in terms of population and her town literally had a brick factory. The housing market, and overall public infrastructure for that matter was built to accommodate all those residents. However as population has declined, roughly half a percent per year in recent decades, it means vacancy rates are rising and so too is affordability.

Such rural communities, not unlike some of the Rust Belt metros in the Housing Trilemma, face their own sets of challenges that are considerably different than regions with growing pains. That said, rural development does face some challenges itself beyond just market demand. Geographic isolation can raise the costs of materials due to longer transportation hauls, for example.

Would love to hear your input too on this given we don’t have a complete story for why the patterns look the way they do. Email me here and let us know!

Finally, there are a number of additional charts below for those interested, including a histogram of where each Oregon county lines up across the country.

Posted by: Josh Lehner | February 6, 2017

Supply Chains and Trade, States Edition

International trade and the impact of globalization continues to be a hotly debated topic. See Brad DeLong’s thoughtful piece at Vox and Jared Bernstein’s rejoinder, for recent examples. They both highlight the fact that trade policy and individual trade deals are distinct and have different impacts, even as nuance gets lost in conversation.

While much of the current discussion tends to focus on a particular trade deal like NAFTA or trade with a particular country like China, in a world of global, just-in-time supply chains, it gets tricky and complicated really fast. Bill Conerly, economist and member of the Governor’s Council of Economic Advisors, made this point in a recent article. Bill noted that all major manufacturing subsectors rely upon imported parts and materials for some portion of their production, even if the bulk of that production was here in the U.S. It may be an appliance factory that imports a particular valve, or a paper plant that imports a particular machine used in the paper making process. As such it’s not just about direct trade or trade balances necessarily. In fact, the vast majority of states have very little direct trade exposure to any given country or region of the world. The real issue is about the global supply chain and any potential disruptions.

What follows is a high level look at imported supply chains, state industrial structures and then direct trade exposure by state to Latin America and China. Unfortunately the data used here from the BEA and Census is imperfect, as noted on their respective websites, but as good as we have available to us. The findings are suggestive of these trends and potential impact, even if specifics are sure to vary should any disruptions come to pass.

First, approximately 20% of the intermediate goods and commodities used in U.S. manufacturing are imported. That’s a sizable share overall but it does varies considerably by subsector. These figures are calculated using the BEA’s IO tables, their import matrix and use tables specifically. Overall the subsector patterns make intuitive sense. Food, Beverage, Tobacco and Wood Product manufacturing use a lot of domestic inputs (U.S. grown crops). Machinery, Transportation Equipment (cars, heavy trucks, airplanes), Computers and Electronics rely on imported iron, steel, wires and the like. The one item that really stands out, however, is Petroleum and Coal manufacturing. While the U.S. does import a lot of petroleum, I’m not entirely sure this import share perfectly applies here and then not by state either. This is where imperfect data comes in. The BEA compiles domestic vs imported sourcing for all types of commodities and intermediates. They then assume that each sector that uses a given commodity uses the same domestic vs import share. That said, the available data does confirm Bill’s argument of the reliance on imported inputs across manufacturing sectors.


Second, the industrial structure of regional economies can help us assess potential supply chain risk across the country. Not that these are the states that will be most impacted, just that they have a larger concentration of manufacturing in the sectors with higher import shares. This too relies on imperfect assumptions but is the best we can do; the results are suggestive of the general patterns seen in the data. As such, the energy states rise toward the top given their industrial structure. Locally, even as Oregon has a large high-tech manufacturing sector, the state has a lower implied share due to the size of Food and Beverage, and Wood Products.


Third, the work above speaks to global supply chains in general across industries and states. However much of the recent discussions have centered on trade negotiations, or renegotiations with specific countries. To what extent do regional economies trade or rely upon trade?

The first scatter plot shows state level trading patterns with Latin America overall. Mexico is the dominant trading partner here, with surprisingly little trade with the rest of the Caribbean, Central American and South American countries. To normalize the data across states, I show exports and imports as a share of state GDP. Note that the state import data is still relatively new in the data world and is known to be less complete and robust than the export data. That said, most states have relatively low levels of direct trade exposure to Mexico and Latin America more broadly. Clearly this is not the case for states like Michigan (auto and related imports) or Texas and Louisiana (large imports and exports).


The second scatter plot shows state level trading patterns with China. Again, there appears to be relatively small levels of direct trade exposure for most states. That said a few states stand out. On the export side, both Washington (aerospace) and Oregon (semiconductors) trade considerably with China. In Oregon’s case, however, we know some of that is within firm shipments and not necessarily selling products on the open market. To what extent within firm shipments, or vertically integrated companies would be impacted by worsening trade relations is an important question to ask. I don’t have the answer to that but it’s worth considering.


On the import side, California and Tennessee stand out. In both cases, a sizable share of these imports are either computer equipment or communications equipment (both in NAICS 334). For California it’s about 33% of all Chinese imports and for Tennessee it’s about 60%. One question I have would be does this represent direct trade or the fact that Tennessee and California act as distribution hubs. Are some of these goods just sent to warehouses from which they are then sold to customers all over the U.S.? This question brings us back to the start of the post.

Global supply chains mean that every major manufacturing sector relies in part on imported commodities, intermediates and the like. Assessing economic benefits, or costs, is considerably complicated. As the state trading patterns show, not that many states have large levels of direct exposure, however we know it’s not that simple. A disrupted supply chain, should it occur, will have knock-on effects throughout the economy. This is particularly the case during the initial adjustment phase where supply chains may need to be reworked through finding new suppliers, changing cost structure due to taxes or regulations and the like.

Posted by: Josh Lehner | January 30, 2017

Oregon, Diversity and the Middle East

People have been moving to Oregon in droves ever since Lewis and Clark*. This fact is a foundational statement in our office’s presentations and one of the key reasons Oregon’s economy outperforms the typical state over the business cycle. As our office has pointed out in the past, Oregon is essentially a 50-50 state when it comes to Oregon-born residents vs those born elsewhere in the country. Focusing only on adults (children don’t get to decide where they want to live) shows that just 38% of adult Oregon residents were born in the state.

What, at times, goes unsaid is that we’re primarily talking about domestic migration and not international migration, of which Oregon does not receive a large influx. Like the rest of the country, Oregon is becoming more diverse over time, however the state does rank below the national average when it comes to racial and ethnic diversity. That said, Oregon does not rank last or even in the bottom 10 states either. After every decennial Census, Kanhaiya, our state demographer, compiles the data across states and counties here in Oregon. What his data shows, is that even as Oregon may be diversifying faster than all but a handful of other states, we rank 32nd most diverse in both 2000 and 2010. It takes a really long time to change relative rankings across states, even if short-term trends are considerably different.


Within Oregon, only Jefferson County has a higher diversity index than the U.S. overall. A handful of counties — Hood River, Malheur, Marion, Morrow, Multnomah, Washington and Umatilla — are just a notch below the U.S. and certainly above the median state.

While the above focuses on overall diversity, given where much of the national discussion is right now, I thought I would dig into the data and focus on Arab and Middle Eastern countries. Data speaks to me, so being able to put topics in some sort of numerical perspective helps.

What I ended up doing, as shown below, was focusing on ancestry. How do people self-identify where they come from? This does not measure attachment to a location or ancestry, but rather a person’s heritage, roots, and the like. I started with the list of specific countries listed in the executive order, but then broadened it given that the Census Bureau has a specific Arab category that incorporates additional countries and ancestries. Finally I also included a few additional ancestries, such as Israeli and Palestinian, to compile what most consider the broader Middle East.

All told, my classification of Arab or Middle Eastern ancestry shows that 2.8 million U.S. residents, or just over 1 percent identifies as such. Here in Oregon the figures are 27,000 and 0.8 percent. To help put those figures in perspective here in Oregon, that’s roughly equivalent to a city the size of Redmond or Tualatin, or slightly larger than Union or Wasco counties. This data comes straight off published Census/ACS tables (B04006). In examining the underlying microdata it shows that 1/3 of such Oregon residents were actually born abroad in the countries that are home to these ancestries. The rest were born abroad in a different country, or here in the U.S.


Among Oregon counties, Benton, Clackamas, Multnomah and Washington, all have shares of the population above the U.S. average for Arab and Middle Eastern ancestries.

Finally, a few years ago the Census Bureau compiled a research brief on Arab households in the country. Among their findings were that Arab households tended to have a higher percentage of married-couple families, larger household sizes, higher incomes and a lower homeownership rate than the overall population.

* If you want to go back to the Bering land bridge, it’s true for an even longer time period.

Posted by: Josh Lehner | January 26, 2017

Expansions Don’t Die of Old Age

In a recent meeting someone mentioned that much of the current state budget discussion is based on structural issues — revenue growth not keeping up with expenditures — but at some point in the not-too-distant future we will be back to having cyclical budget issues. In our world that counts as gallows humor and we all nodded our heads in agreement because it is undoubtedly true. Such issues are what keeps forecasters up at night. The comment also dovetails with a question we hear a lot in presentations, something like “Aren’t we due for another recession?” Well, the short answer is no. The long answer is yes another recession will come, but it won’t be because we hit some magical length of time or duration of expansion.

That said, the current economic expansion is getting a little long in the tooth based on historical patterns. Next week we will tie the 1980s expansion for the 3rd longest since WWII. Many economists today are now talking about a maturing business cycle. Here in Oregon, as we approach full employment, we’re seeing job gains slow. Nationwide it appears we’re now somewhere past the peak of the cycle in terms of growth rates. Now, the expansion is expected to endure for awhile longer — the WSJ consensus puts the probability of recession at 16% — but it’s obviously clear we are no longer in the early stages of a recovery.

In fact the current expansion, at least in terms of length or duration, is beginning to enter rarefied air. The last time the U.S. economy was in expansion this long was back in October 1998. Aerosmith’s “I Don’t Want to Miss a Thing”, Barenaked Ladies’ “One Week” and Tim McGraw’s “Where the Green Grass Grows” were topping the charts. And the time before that was in the summer of 1990 when Madonna’s “Vogue” and New Kids on the Block’s “Step by Step” went to #1. So, yeah, it’s been awhile.


Thankfully there is no real mathematical relationship between the length of an expansion and the probability of falling into recession. Now, there is some relationship, but it is weak. As an expansion hits 7, 8, 9 years in duration the probability of remaining in expansion still tops 90%. That said, this simple model based on actual U.S. experience necessarily blows up at 10 years which is the longest expansion on record. It’s not that an expansion can’t last longer than that, just that we haven’t seen it. Furthermore, when it comes to Oregon state revenues, we went nearly 20 years without a major revenue event, from the early 1980s up to the 2001 recession. The reason was the 1990 recession was mild and while revenues stopped growing, more or less, they did not plunge like they typically do.


Ok, so why do recessions happen? Well, they can come in various forms — supply side shocks, financial crises, currency crises and so forth. However the story economists usually tell is about imbalances. These can be sector-specific — high-tech in the 1990s or housing in the 2000s — but usually results in a generally overheating economy. Price pressures build as demand outstrips supply. The economy operates for a time beyond full capacity. As such inflation rises and the Federal Reserve steps in to take the punch bowl away. This was at least the typical pattern prior to the last few recessions.

Former state economist Tom Potiowsky likes to say that expansions don’t die of old age, they die due to mistakes. Those can certainly be policy mistakes, monetary or fiscal. However there still generally needs to be some sort of coordinating event to turn any growing pessimism into a recession. Some sort of Wile E. Coyote moment when it becomes clear we did run off the edge of the cliff. Then a recession ensues and we start the cycle again.

Where exactly the economy is in this chain of events is a hotly debated topic. While I don’t need to tell you this, but I will anyway, the economics profession hasn’t exactly wrapped itself in glory in accurately forecasting recessions in advance. As one of our advisors says, however, we’re really good at autopsies. Yet we still try our best to gauge where the economy is, how it is performing relative to the Fed’s dual mandate and the like. As stated above there is typically a period of time, somewhere between 2 and 4 years, where the economy operates beyond full capacity prior to the next recession. Today, the U.S. economy and here in Oregon is just now approaching or reaching many estimates of full employment. Using the past as a guide, there is likely still room to run for this expansion.


Unfortunately there is no silver bullet for forecast uncertainty. Our office does at least three things to help provide context for the outlook. First, we use our leading indicators and Tim Duy’s as well to help us with turning points in the economy. Such indices can be best thought of as green light/red light indicators. Second, we provide historical revenue forecast errors along with revenue tracking each quarter, which help show how much uncertainty remains as the biennium progresses. Third, we also provide a set of alternative scenarios — developed with the Legislative Revenue Office and based on historical examples — to try and show what sort of economic and revenue changes could be expected should a recession begin in the next year or two. That said, these items obviously do not solve the budgetary consequences of an actual recession should it occur.

Posted by: Josh Lehner | January 23, 2017

Oregon Wages, 1980-2016

Average wages in Oregon are picking up as the economy approaches full employment. The graphs below aim to help place these gains in a better historical context. The first chart shows inflation-adjusted wages in Oregon in recent decades. The figures noted in the graph are annual averages from business cycle peak to business cycle peak. They try to answer the question of how much progress has been made over the entire business cycle.  realavgwage8016

Economists tend to analyze real, or inflation-adjusted gains because they are a marker of overall economic progress. If wages and economic growth are only keeping pace with inflation, then there has been no real progress made in a lot of respects. Yet, even as most people understand this in concept, we tend to focus more on nominal growth when it comes to our wallets since it’s a lot easier to see. All you do is compare your paycheck this year to last year. However the differences between nominal and real gains differ quite a bit over time and have big implications.

Take the 1980s as an example. During that business cycle, average wages in Oregon increased by 4.2% per year, however inflation was increasing by more than that. So on net, or in real terms, average wages in Oregon actually decreased in the 1980s because wage gains did not keep pace with inflation. The 4% gains were nice to have, but the average worker did not come out ahead.

The 1990s were different and in a very good way for the economy (outside of the forest sector). Nominal wage gains were nearly 4.5% per year, significantly outpacing inflation. As such real wage gains were 2.2% per year over the entire business cycle. Note, however, that the eyeball test shows much of those gains came in the second half of the decade. The slope of the line is steeper in the late 1990s than in the early 1990s. As the economy approached, reached and even surpassed full employment, workers saw really strong wage gains.

That’s the economic state we’re once again beginning to approach. Oregon overall is at full(ish) employment and an economy where labor is scare behaves differently than an economy digging out from a recession. Now this is not the case in every county or region, but statewide and in some of our metro areas it certainly is. See this Bend Bulletin article for example.  And given that full employment is much more a concept than a hard calculation, economists look for trends and patterns in the data that show signs of full employment. One key measure is wage growth.


In terms of the outlook, our office expects these conditions to continue in the coming years. The labor market will remain tight. Bargaining power has shifted somewhat back to workers and businesses must compete more on price to attract and retain the best talent. As such, average nominal wage gains are expected to remain around 4% per year, at least until the next recession. In real terms, this works out to around 2% per year as most forecasters expect inflation to be roughly 2% per the Federal Reserve’s stated goal. Note that the data below is BEA income data and differs somewhat from the QCEW data above.


What is expected to change however is job growth. Adding 5,000 jobs per month is unsustainable when the state only needs 2-3,000 jobs per month to keep pace with population. Those gains were needed and welcomed during the recovery, however, the gains have already slowed and are expected to continue to do so. The good news here is that the focus at this point in the business cycle is no longer on how many jobs were added last month, but on the bigger picture and deeper measures of economic well-being. This includes items like median household income, poverty rates and even caseloads for needs-based safety net programs.

Posted by: Josh Lehner | January 10, 2017

City Club of Portland (Video and Research Links)

Last Friday, January 6th, 2016, Mark was the guest for the City Club of Portland’s Friday Forum. The event was titled “Recovery for some? Oregon Economic Review & Forecast”. He was interviewed by Marissa Madrigal, Multnomah County’s Chief Operating Officer. I am a little biased here but I thought it went really well and the discussion covered a lot of important topics and research. That plus Mark is funny, you know, for an economist.

The video below, from the City Club of Portland’s YouTube channel, lasts just under 55 minutes. For those looking for a shorter version, note that Mark and Marissa’s conversation starts at 2:25 and the meat of the conversation ends at 38:05.


Many of Mark’s talking points follow directly from our office’s underlying research. Below are a collection of links for those wishing to read more.

Opening Question and Remarks (video time stamp 2:25)

Oregon’s economy is pretty healthy. First came the recovery in Portland (and the Gorge), then the secondary metros came online a couple years later and now in the past few years, rural Oregon is growing again. The typical rural county has regained about half of its recessionary lost jobs. See our Rural Oregon report for more as well.

An economy approaching full employment differs from one digging out from a recession. The tightening labor market has different implications for workers, businesses and regional job growth. Rising wages and job openings are drawing more folks into the labor market, participation is rising. The combination of the higher wages and higher employment rates means that we are now seeing income gains for households in the middle and lower parts of the distribution who rely solely on wages and the safety net. Finally poverty rates are beginning to fall for areas of the state closer to full employment, which does not yet include every region.

Lastly what this means is that job growth is expected to slow moving forward. Oregon only needs 2-3,000 jobs per month to keep pace with population growth. Our office expects the state to transition down to this more sustainable rate of growth in the near future. And yes, there will be enough jobs.

Housing (9:00)

Affordability is a statewide issue, not just a Portland or urban issue. (Our rural affordability work has not yet been published but will be). That said the focus solely on affordability itself can be a bit misplaced. As our work on the Housing Trilemma shows, there are some trade-offs associated with a strong regional economy, a high quality of life and housing affordability.

Overall the worst of the affordability crunch may be behind us, housing is at or near an inflection point. Supply is beginning to catch up a little bit and income gains are now seen among middle- and lower-income households as the economy improves and full(ish) employment raises wages.

As Mark notes the supply side of the housing market has been the issue. There are a number of suspected reasons, including land use laws, construction costs, labor shortages, uncertainty or fear among developers, bankers and/or regulators. Our office presented this discussion to the Legislature a number of months ago but have not yet written a summary.

New construction is always expensive and targeted to the upper-middle or upper portions of the market. Housing does filter over time. The key component is to ensure that supply continues to be added to the stock.

Jobs (18:25)

Job polarization — the concentration of growth among high- and low-wage occupations with meager trends among middle-wage jobs — has been shaping the economy for decades. See our report Job Polarization in Oregon for a more thorough analysis.

See here for more on the software sector, plus an overview of the entire high-tech sector.

Automation impacts middle-wage jobs considerably. See here for our historical look at the wood products industry in Oregon. Also here to see how automation and technological change impacts women in middle-wage jobs just as much as it does men.

Business Cycle Trends and Recession (23:27)

Oregon’s economy is more volatile than the nation — we have stronger expansions and deeper recessions. This is for two primary reasons. First, Oregon remains a manufacturing state. Second, migration. People have been moving to Oregon in droves ever since Lewis & Clark.

Oregon sees the largest influx of new residents among the 20- and 30-somethings. These so-called root-setting years are very important for longer-run economic growth. As our office’s report details, many, and usually most of these young migrants have college degrees. In fact a majority have scientific, technical or medical degrees. See here for how Oregon’s young college migration trends compare with other states.

Impact of Affordability on Young Creatives (27:27)

Research indicates that the you get the best outcomes from homegrown businesses and industries. Focusing on investments that make a location a good place that young, creative entrepreneurs want to be helps drive some of this success. See our report on Start-Ups and New Business Formation.

Marijuana and Alcohol Clusters (31:21)

Recreational marijuana is still an infant industry. We do not have a lot of good data yet. Previously we looked at the border impact with Washington. However as Mark talked about we really care about the broader impact of ancillary industries and the high value-added products and services. A good example is the alcohol cluster here in Oregon. See page 4 of our beer report for a more complete summary. And here is a chart comparing employment growth for the the overall alcohol cluster in Oregon and the U.S.

Gambling (35:22)

The impact of the Cowlitz Tribe casino is detailed on PDF page 30 in our December 2016 forecast. See here for our report on the Great Recession and gaming, and an update on recent trends following the roll-out of new video lottery terminals across the state.

What Do Economists Talk About? (38:05)

You’ll just have to find out for yourself…

Public Q&A (39:45)

Questions include the impact of recent ballot measures on lottery funds, the state budget gap, federal policy expectations, the minimum wage, PERS, and labor/capital substitution.

Posted by: Josh Lehner | January 4, 2017

The Housing Inflection Point

There is no question that housing affordability has been a key, maybe the key economic story in recent years. However it does not mean affordability will continue to erode always and forever. In fact, the housing market is somewhere near an inflection point today. I would argue we’re already past the true inflection point, however if not, I suspect it’s close.

What I really mean is that affordability will stop getting worse. This goes for both ownership and rentals. Now, it may not improve considerably for some or even most households. And I do not expect affordability to suddenly return to previous levels, but it does mark a step in the right direction. A necessary but insufficient condition, if you will.

The reason for this is two-fold. First, while the lack of new construction and overall supply have been the issue in recent years, supply appears to be starting to catch-up to demand. This is particularly the case for multi-family rentals. Even as the vast majority of new units are at luxury price points, this will have an impact on the overall market. Housing does filter, although there is a multi-decade time lag for the actual units. However the (coming) market saturation for luxury apartments, and with another 25,000 units in the pipeline per the Barry Apartment Construction report, price pressures will subside overall. Similarly, City Observatory has pointed out repeatedly about the slowing price trends in Denver and Seattle to name two.

Where price pressures seem to be more entrenched is on the ownership side. Inventory remains near historic lows. There is simply not enough houses for sale and thus a sellers’ market. That said, inventory has risen just a hair in recent months which is a positive indicator. This increase is not nearly enough and prices (based on buyer and seller expectations) do not adjust immediately. However should inventory continue to increase — and it likely will with big projects like South Cooper Mountain, South Hillsboro and new construction in Clark County coming online  — then better market balance is to be expected. And better balance means slower price increases and improving affordability. Similarly, rising interest rates should slow price appreciation as well, however given higher financing costs, this should have no real impact on affordability itself, just the sticker price.


The second reason for the inflection point is that household incomes are rising across the spectrum. Our office has talked quite a bit in recent months about the importance of full employment and the impact a tighter labor market has on households in the middle and bottom part of the income distribution. All these households have are wages and the safety net. As bargaining power shifts more toward workers and wages rise, incomes for these households rise as well. Higher incomes result in better affordability. This does not mean that housing will necessarily be affordable, rather that the erosion of affordability is likely over when looking across the market. The chart below shows the median rent for households in the Portland MSA with incomes less than $50,000 per year. Rents have gone up nearly $200 per month and the share of income spent on rent has jumped from 32% to nearly 38%. No question that affordability is worse today than prior to the Great Recession. However notice that even as rents are rising, when measured as a share of income, we are seeing costs plateau. Again, this does not mean housing is necessarily affordable. Rather that affordability is no longer worsening. That is a big distinction and marks an important milestone, but hopefully not the destination.


Bottom line: Housing affordability is worse today than a decade ago. This is particularly true for lower-income rental households who have seen costs rise significantly with income gains only coming in the past couple of years. That said, affordability is showing signs of stabilization overall and some segments will see improvements in the near future. This is a result of housing supply continuing to increase (although it does not appear to be enough to drive prices down in a meaningful way, at least not yet based on the data) and income gains finally seen among middle and lower-income households. The baseline outlook should be for these these trends to continue. However to see significantly better affordability there needs to be a sizable increase in supply above current trends or a decline in demand. As the business cycle matures, an increasingly likely scenario is that the market won’t return to better balance, or dare we say an oversupply, until the next recession when we know demand will drop. That means market balance would not be achieved via a significant increase in supply, but rather a decrease in demand.

Posted by: Josh Lehner | December 29, 2016

Regional Poverty 2015

Previously in our Poverty and Progress series our office examined Oregon overall, the Portland metro area and Josephine County. As mentioned at the time, the Census Bureau recommends using the Small Area Income and Poverty Estimates (SAIPE) for local level figures. The 2015 data was just released a couple of weeks ago. The graph below compares regional poverty rates across Oregon with the state and national figures overall for the past two decades. These results largely follow our previous analysis which primarily used the ACS data, and of course you would expect them to be broadly similar. However the trellis graph gives a clear and easy way to compare trends across regions.


As we have pointed out, much of the improvement in recent years has come in the Portland MSA and then the broader Willamette Valley. These areas saw economic growth return first and have seen relatively strong gains since. Such growth leads to a tightening labor market with strong wage gains, which in turn drives household incomes higher and lowers the poverty rate. As these labor market improvements continue into other regions of the state, household income gains and poverty rate declines are likely to follow. We’re just not there yet, for the most part. This relative pattern is at least in part due to the timing of local and regional business cycles. Provided the overall economic expansion continues, improvements throughout the state can be expected in the coming years.

Even as economic improvements are a big part of the short-term story and for the working-age population, those clearly are not the only trends impacting measures like the poverty rate. Greg Tooman, regional caseload forecaster for DHS/OHA has some great insights into what impacts and drives local level trends. I have copied a comment of his below. Thanks Greg! For more on the DHS/OHA forecasts see the latest statewide forecast here, and the regional outlook here.

As the regional forecaster for the Dept. of Human Services, I’ve come to understand that the relationship between poverty and jobs is weaker than most people think. It’s undoubtedly true that the employment picture is better in Josephine Co., but in most cases employment isn’t enough to move people out of poverty unless it’s full-time. Although Grants Pass has been recently reclassified as an MSA, the area has a lot of the features we see in a rural county – a high population over 65, unemployment historically higher than statewide, etc. You’ve talked about the rural/urban split here before. The pattern in Grants Pass/Josephine looks typically rural. And in rural counties, slow reductions in our means-tested caseloads are common. We expect SNAP to fall by about 18% statewide between now and the end fiscal 2019; we expect it to fall only 11% in Josephine Co. Similar story with TANF. Wages may be more the key here than employment itself, since that would signal the growth of full time employment necessary to pull people out of poverty and off of our services.

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